Earlier articles by Maxwell and Magowan are in the BicycleRetailer.com Opinion & Analysis section.
Business-school graduates have a sad fact drummed into them: across the merger and acquisition landscape, more than half of all deals actually destroy rather than build value. If bike shop X is worth $2,000,000 and bike shop Y is $1,000,000 there's a better than 50-50 chance that a year after X buys Y that the combined entity will be worth something less than $3 million. Schwinn's descent into bankruptcy after buying GT Bicycles, Accell's recent wind-down of its Seattle Bike Supply (SBS) purchase, and Performance Bicycle's misplay of its Supergo retail buy are just three examples where value has actually been destroyed – with which a veteran reader of Bicycle Retailer will be all too familiar.
The evidence suggests that acquisition-based growth strategies in the cycling industry fail for one of three key reasons. First, in some cases, it is not clear that there really is a strategy. For example, "get bigger" or "build market share" are not really very well-defined or thought-out strategies – they are just basic statements of ambition. However, if simplistic notions like these are the only drivers behind a "strategic" plan, then it's hardly surprising that the plan is likely to fail.
Second, in some cases the buyer and seller may just be too dissimilar culturally. In a lifestyle sport such as cycling culture matters and that distinctiveness can be a major driver of value. Can a primarily engineering, product-driven company coexist with a marketing, customer-centric firm? It's possible, but it seems in deal after bicycle deal, an old-line established company – often from the east coast or Europe – buys a newer, often eccentric west coast company, and the two firms don't really mesh, with a consequent loss of value.
Lastly, and probably most common, is the situation where the acquiring company does have a logical and well thought-out strategy behind the transaction, but where that strategy is never fully or appropriately implemented – due to insufficient management attention and focus. Experienced executives of successful acquisition-based companies will tell you that the real work in a successful transaction actually begins the day after the deal closes.
Top management's job is to develop a strategic vision and growth plan, but it takes a whole company to make an acquisition work successfully. There is a big difference between the strategic vision of growth developed at the executive management level, and the challenges of translating that vision into a workable operating plan on a day-to-day basis in the trenches. The situation is akin to viewing the landscape from inside an airplane cruising at 35,000 feet, versus negotiating the actual terrain on foot. From the 35,000 foot executive perspective, the terrain may seem pretty flat and simple; for those "on the ground" charged with actually implementing the plan, however, there are invariably difficult mountains and valleys to negotiate in the achievement of the goal. An effective integration process can be condensed down to several critical factors:
- Recognize the critical significance of integration planning, and create a specific function for managing it. The task of managing acquisitions is not something that a few people should do part-time and then go back to their "real" jobs – this is a critical function, particularly in acquisition-oriented companies, and someone has to be specifically charged to making it work.
- Make sure there is a well thought-out plan for the integration process. As a potential transaction moves forward, there needs to be a plan; make sure you know what you're doing before you plunge into it. Those who wait to start the integration process until after the deal is closed inevitably run into problems. This up-front work can include activities such as thinking through the external and internal communications that will be essential to ensure a smooth transition, and a review of the potential for cost-savings.
- Build an integration team, with employees from both companies. The leader of this team needs to be someone who is not only highly regarded but who will also have some real authority to implement what can often be very difficult decisions. Typically, this person will be drawn from the acquiring company, though not always; management from the acquired company will typically know much more about the internal workings and where the opportunities and challenges may lie. This team should regularly assess its progress and schedule against the strategic implementation plan developed at the outset, and should move to finish the key elements in the plan as quickly as possible – uncertainty and time delays are often the most destructive aspects of a post-deal integration process, and can have an immediate negative effect on the morale level in both companies.
- Respect what you are acquiring. You are supposedly buying another company because it offers something unique. But too often the acquirer acts like a medieval conqueror, laying waste to the acquired company's people, property and brand. In 2002 Performance Bicycle bought the Supergo retail chain because it was better merchandized and profitable; five years later after the departure of key staff, the Supergo brand was effectively killed off, with seemingly few of Supergo's attributes incorporated into the larger entity.
- Design a jointly-developed business plan for the combined entity early on. If key individuals from both sides of the deal are charged with designing and articulating a joint business plan before the deal is approved, the likelihood of achieving the targets of the proposed transaction is raised significantly. On the other hand, if it's difficult to construct such a jointly-developed business plan, that may suggest that the deal doesn't make much sense to begin with; by this method, ill-conceived transactions can often be flushed out ahead of time – saving both parties a great deal of time, money and headaches.
- Pay attention to personnel issues. This should go without saying – yet many firms fail to keep their employees properly informed. Change can be highly threatening to people – and these sorts of anxieties can sometimes cause otherwise attractive deals to metamorphose into failures. If people aren't informed, they get worried, they become less effective, and eventually they begin to leave. The ultimate strength of any company lies with the talents and capabilities of its people – yet many companies shoot themselves in the foot by failing to remember this.
- Really think through your consolidation plan to cut costs. It sounded logical that Schwinn and GT could save money by consolidating overlapping warehouses into fewer locations. But no one appears to have thought through that it would result in longer (and more expensive) ship times to dealers, lower inventory turns, and reduced product availability, all compounded by two different inventory software platforms, and little regard for what dealers wanted. That Accell did almost the same thing 15 years later with SBS illustrates that the lesson isn't easily learned. And if you think that by combining two bike shops in the same town you can combine service and repair at one location across town, you might want to run your plan by key customers first.
- Maintain a focus on timely and honest communications at all times – to all stakeholders, but particularly to employees. Top management has probably been talking about what a great deal this is, and how much sense it makes – but they have to put that talk into action. Management should make and announce the difficult or sensitive decisions quickly, even if they are not particularly popular – employees will quickly gain more respect for a management team that addresses the difficult issues head-on, rather than one that waffles or sticks its head in the sand. Said another way, it pays to be straightforward, even when the news is bad. The quicker the tough decisions can be made, the more quickly the future team of employees can actually start working productively together to make the deal successful.
In summary, post-deal integration may not have the "thrill of the chase" – the glamour or the allure that finding and putting together the deal has for many corporate executives. However, it is every bit as important in a successful acquisition-based growth strategy.
Steve Maxwell is co-editor of the cycling website, www.theouterline.com and Managing Director of TechKNOWLEDGEy Strategic Group, a Boulder, Colorado-based firm specializing in merger and acquisition advisory services. Felix Magowan is partner at Pocket Ventures, a private equity firm, former owner of VeloNews, and a founding investor and board member at Pearl Izumi. Maxwell and Magowan have advised dozens of firms on strategy and transactional issues, and can respectively be reached in Boulder at (303) 442-4800 or (303) 443-4360, or via e-mail at maxwell@tech-strategy.com or fmagowan@pocketventuresllc.com.
